Morning Bell: Not So ‘Smart’ Housing Policy

This Wednesday, government-sponsored entity Freddie Mac announced that it lost $2.8 billion in just the last quarter alone from foreclosures and other related expenses. Both Freddie, and its sister Fannie Mae, are at the core of the recent housing finance crisis.

Freddie and Fannie help finance 40% of all U.S. mortgages, and in 2004 the two GSEs bought a combined $175 billion in subprime backed securities — 44% of the subprime market. Liberals are desperate to pin the housing crisis on anybody other than government intervention in the marketplace. Government Reform Chairman Henry Waxman (D-CA) has even decided to go on a fishing expedition. He has sent letters to Freddie and Fannie CEOs asking if they have any evidence that the White House “precipitated the recent distress in the shares prices” of the two GSEs. If Waxman wants a real explanation for the housing finance turmoil, he should drop the partisanship and investigate the local government of his hometown, Los Angeles, instead.

According to the Office of Federal Housing Enterprise Oversight, only four states — Arizona, California, Florida and Nevada — have suffered declines in home prices greater than 4%. Meanwhile, major metropolitan markets such as Houston, Dallas and Indianapolis have hardly seen their home prices fall at all. In other words, the “national” housing crisis is actually just a set of small “local” market corrections. And as Heritage scholars Wendell Cox and Ronald Utt detail, the hardest hit housing markets all have one thing in common: tight land use restrictions. Utt and Cox write:

Over the past few decades, a growing number of states and communities have adopted so-called “smart growth” strategies that discouraged new construction and population growth by using restrictive zoning and tax policies to limit the amount of land available for development. In recent years the regulatory mechanisms that have been used in this effort include growth boundaries, minimum lot sizes, land set asides, impact fees, mandatory amenities, and building moratoriums.

The result of these “smart growth” strategies? An artificially tight housing market inflexible enough to meet rising demand without sending home prices into the stratosphere well beyond the reach of working class Americans.

A tool called the “median multiple” (calculated as the ratio of a region’s median house price to its median income) demonstrates just how effective local government regulations have been at pricing working class families out of the housing market. Localities with few land use restrictions such as Dallas, Atlanta, Houston and Indianapolis all have median multiples between 2.3 and 2.9. Heavily regulated cities such as Boston, San Francisco, Miami and Washington all have median multiples between 5.5 and 10.8. Waxman’s home town of Los Angeles leads the league with a median house price 11.5 times the size of the median income. Cox and Utt conclude:

Economics is clear on this issue: What is rationed is more costly. The differences in the costs of construction between, say, Houston and San Diego are not that great. The home price difference is nearly all in land costs, and land costs have exploded as overly restrictive land use planning systems have been unable to accommodate the demand attributable to population increases. … In a time when there are increasing concerns about the rising cost of living over everything from gas prices to food prices, policymakers should hasten to dismantle the excessive land use regulations that say “no to the next generation of American homeowners.

Join The Discussion

Your statistical data on [lack of] generalized decrease in market prices is inaccurate, though your position is correct. To put inaccurate data points with a correct position might detract from the correct position. Using Houston and Dallas, Oil Belt Economies to make the point is inappropriately skewing the data to reflect positive effects of oil prices on those individual and in the case of Houston, Highly Specialized Economies. It is also important to point out that Houston and Dallas past S&L crisis depressed housing markets took smaller advances over time as surplus housing product took almost 20 years to fully absorb and re-distribute into normalized housing appreciation after a significant lack of core lending induced real estate correction.

Socialization of the housing market through excessive intervention is without precedent, the housing market must be allowed normal correction and foreclosure process and banks must take responsibility for their bad financing decissions, including buyers of those loans like Fannie and Freddie. Bailing out borrowers, other than those who were defrauded, is contrary to free market principals. Bailing out banks, other than those who were defrauded by mortgage brokers, is contrary to free market principals.

Please use correct statistical data when making your next statement on housing.

I do not know who your real estate analyst is but I recommend they enhance their education on actual market conditions and long term localized trends and rate of change in localized trens.

As a resident of Santa Monica, I have to disagree with the assertion that everything else is equal when comparing L.A., S.F., N.Y., and S.D. to Indianapolis, Atlanta, etc. The author reasons that the land use policy is what drove real estate up in the former locales compared to the latter cities.

Santa Monica's home prices are not sky high because the government is not allowing building. It's a hugely desirable area to live with a limited supply of land.

Are you are suggesting that the city re-zone residential districts to allow for towers of condominiums, thereby destroying neighborhoods?

I don't think this is a good solution.

Further, one of the hardest hit areas of price contraction is out in the Inland Empire where new construction was rampant. This seems to fly in the face of the author's conclusion.

The far left and their lackeys, mostly members of the democrat party, have been engaged in social engineering for the past 45 + years. The housing debacle that we are now dealing with is but one of the results that such social engineering has produced. To force banks and other lenders to give loans to people that do not have the ability to repay the loan, in the name of “political correctness,” is criminal. As long as these far left demagogues can achieve their goals of appearing to care more than anyone else, they do not care how much taxpayer money they spend. There have always been pockets of “Boom and Bust” in the real-estate market, but as long as the free market has been allowed to work, this type of catastrophic collapse has been avoided. To force me to pay for others’ corrupt borrowing and lending polices is legalized robbery. Legalized robbery is when the government forces me to send in the taxes they have levied with the threat that if I do not comply, they will come to my house with a gun and force me to do so.

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